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Economists forecast major setbacks in bleak 2023 outlook

Author: ICAEW Insights

Published: 06 Jan 2023

Real wages dropping to 2006 levels, house prices declining by 8%, a fall in happiness, a spike in divorces – just a few predictions from PwC. But there is light at the end of the tunnel.

As 2022 drew to a close, the UK finished the year in a cost-of-living crisis, with business confidence at its weakest level since the pandemic and with recession looming. But there were signs of hope as inflation began to fall from a 40-year-high and unemployment dropped to extremely low levels, so what does 2023 have in store?

“The outlook is exceptionally bleak, with the UK facing a toxic mix of recession and soaring inflation,” Suren Thiru, economics director at ICAEW, reported in the Financial Times. “High inflation and tighter monetary and fiscal policy are likely to continue to squeeze incomes, keeping the UK economy underwater throughout this year. Indeed, it’s probable that quarterly GDP growth will be negative throughout 2023.”

Thiru added that the UK will probably lag behind other developed economies because, unlike them, structural challenges such as Brexit are exacerbating trade frictions and staff shortages, making it harder to deal with these headwinds.

Meanwhile, PwC’s economic outlook for 2023 predicts that cost-of-living pressures will continue to intensify throughout 2023, with the weekly food shop rising to £100, double the rate at the turn of the century. The housing market is also facing a challenging outlook – the estimated decline in house prices by 8% would be the second sharpest fall in 70 years – while the number of house sales could fall below one million for the first time in a decade.

PwC also predicts that, with UK real wages falling back to their 2006 levels, French workers could overtake their British counterparts as the fourth-best paid workers in the G7.

Divorce rates could soar as happiness falls

PwC’s analysis also forecasts that two significant social milestones may be reached in 2023. It predicts that the UK population may record the lowest levels of happiness since records began in 2013, driven primarily by high inflation rates and rising unemployment, although it may start to improve in 2024.

It is also estimated that the number of divorces will spike by one-fifth in 2023, to almost 140,000 in England and Wales, equivalent to 16 divorces every hour. Divorce rates may not be a standard barometer of economic health and for the coming year this increase is expected to be driven primarily by the introduction of no-fault divorces in April 2022; however, the report cautions that in two years’ time the impact of current economic conditions may become apparent in population data.

Taking all of these predictions into account, Barret Kupelian, senior economist at PwC, stressed that there are signs of light at the end of the tunnel: “Our expectation is that inflation reached its peak rate in October 2022, and will gradually begin to return to target over the next two years.”

However, Kupelian warned that the UK economy would continue to experience a period of high cost-of-living pressure, which would have a number of social as well as economic impacts. “Experience from the previous financial crisis suggests they may be felt for some years to come,” he warned.

Declining inflation and unemployment

PwC also forecasts improvements across the UK labour market – good news for those employers still struggling to hire against a backdrop of tight competition for good recruits and rising salary demands.

More than 300,000 UK workers could rejoin the labour market in 2023, closing the economic inactivity gap compared to the US and reducing staff shortages in highly skilled sectors. In addition, increased immigration to the UK could also directly contribute £19bn to the economy, driving 1% of GDP growth even as the whole economy contracts.

“Despite a contracting economy, the UK remains an attractive destination for workers,” said Jake Finney, economist at PwC. “In 2022 UK immigration levels reached a record 1.1 million, with targeted schemes aimed at Ukrainians, Afghans and Hong Kong residents adding around 140,000 to the total.”

Finney added: “Employers will need to consider how best to attract and retain many of these returning workers, who may be older but highly skilled, with different expectations from the workplace than prior to the pandemic.”

For a deeper dive into what 2023 has in store, listen to our podcast: What can we expect from 2023?

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